The Elephant in the Room: Cryptocurrency’s Massive Bubble(s)

There has been some consensus developing among experts that cryptocurrency is experiencing a bubble. What sort of bubble we are dealing with remains to be seen, and there are varying opinions on this complex matter. While the industry as a whole has barely begun to fulfill its potential as a developing financial alternative, there certainly appears to be a handful of distinct bubbles forming within the walls of what it might become.

Costs Associated With Cryptocurrency Network Maintenance Bitcoin and other cryptocurrencies have driven up demand for electricity and computer hardware.

Copycats This bubble can’t be measured simply in terms of the vast amounts of wealth being created without any notable revenue or assets to back it, but must also be examined in terms of how many copycats are arising, many of which will amount to nothing. It is becoming increasingly difficult for investors to choose cryptocurrency or ICO investments, especially with so many losers looking to make quick profit by dressing up as winners. It is progressing in a very similar manner to the dot com bubble, where a few blue chips will emerge to dominate, and the rest of the industry will be doomed to failure or relegated to over the counter markets.

Blockchain as a Buzzword Blockchain and the decentralized consensus system brought about by Bitcoin has been exploited to the fullest by hype inspiring sales people. They have found a way to create the appearance of massive value by making countless new cryptocurrencies or blockchain based tokens, usually with algorithmically dictated artificial scarcity. This ensures insane returns for the initial adopters, and leaves the later investors assuming an inordinate amount of risk with very little chance of any long term potential gains. Blockchain as an immutable database will go on to lay the foundation for many great inventions and innovations, but blockchain as a marketable buzzword will go the way of other defunct tech buzzwords that were once used to personify an underlying technology.

Reckless Monetary Debasement One doesn’t have to look hard at the cryptocurrency industry to see a perceivable correlation between the value of Bitcoin and the number of offshoots being created. As more copycats arrive on scene, an exponential amount of wealth can be created, especially if these cryptocurrencies operate within shadier parameters. When those who are riding the coattails of Bitcoin (as it’s essentially the industry’s reserve currency) see it explode in value, they are brought along for the ride; even if these copycats have nothing to offer, natural market forces reacting to extreme artificial scarcity is often enough to dupe investors into thinking they’ve found a golden goose that might replace Bitcoin one day.

A fair percentage of large market cap cryptocurrencies values are fraudulently bolstered by exploiting lack of standards and enforcement of the industry. The unorthodox ecosystem does not require fiat investment to generate monetary value. By creating a series of cryptocurrency investments with extreme artificial scarcity (as dictated by the currency’s algorithm), a bad actor can turn a relatively small investment into a fortune in a short period of time. After the worthless currency is dumped on unsuspecting new investors, these scam artists likely put their money back into cryptocurrency they perceive as being a more stable investment with a large market.

If this trend continues unabated, we could reach a point where cryptocurrencies disrupt the entire global monetary system with inflationary displacement. The ease at which money creation occurs is a slippery slope in any monetary system, whether that be cryptocurrency or fiat. This is a huge part of the reason many of us abandoned a currency based on fractional reserve banking in the first place; because it was too easy for a few individuals to create vast amounts of money out of thin air.

The ICO Game and it’s Grim Outlook Platforms who facilitate ICOs and have made billions of dollars by inadvertently peddling fraudulent ICOs, are now backpedaling in a hurry as scrutiny from regulators increases. The influx of new capital from ICOs has caused extreme valuation bloating to those entities which facilitate ICO issuance. If these ICOs were forced to liquidate their limited assets due to regulatory crackdown, bad business practices, or an act of god, it could result in tremendous downward price pressure on the ‘reserve’ cryptocurrency of the issuing platform. The potential ensuing snowball effect would be somewhat reminiscent to the Enron scandal, except in this case it would be all but impossible for investors to recoup any money lost on a cryptocurrency or token security issuance. Since most cryptocurrencies are decentralized and not controlled by a single entity, it makes them very difficult to target with any legal action.

A Brief History of Enron

At one point Enron was one of the largest corporations in the United States, valued at around 70 billion dollars. Enron made it’s mark by capitalizing on deregulated state energy markets, as a middleman who would buy electricity from power companies, and sell it back to consumers. Internally, as a company, Enron executives placed a tremendous amount of their efforts into driving up stock price, which fostered a corporate culture of personal greed. In the 1990’s Enron launched an online energy trading platform. From there, Enron employees manipulated energy markets by purchasing energy futures, then wielded their control over the power grid to periodically shut down power and create artificial scarcity. Which in turn drove up energy futures prices.

When things started to unravel, Enron used crooked accounting to hide losses that were beginning to pile up, and created numerous shell corporations to divert the losses from Enron’s books. Enron executives, associates and employees would later be found to have been skimming money, manipulating markets, falsifying documents, and engaging in insider trading. By the time news of Enron’s scandalous management reached the public airwaves, it was all but too late; executives took their cut and ran, leaving ordinary investors on the hook. However, a successful class action lawsuit was later filed against Enron, seeing 1.5 million investors receive a payout of 7.2 billion dollars in 2006.